An area where we are increasingly involved with both lawyers and accountants is that of s.77 stamp duty relief. This relief is due where one company acquires another by way of share for share exchange and the shareholders and relevant rights and percentages of the acquisitionco are exactly the same as they were in the targetco immediately prior to the share for share exchange.
Interestingly we are seeing more queries in respect of situations where the acquiring entity is a foreign company and there is some doubt as to whether the entity has actually issued ordinary shares – a good example of such an entity would be a US LLC. In certain circumstances this can be a complex matter.
The overall concept is a pretty straight forward one – the number of shares by each individual, the class, and the associated rights need to be the same before the share for share exchange as they are afterwards. The legislation requires that there is a ‘mirror image’.
The mechanics of the relief are that following the transaction a bundle of documents needs to be submitted to HMRC (within 30 days). If the bundle is acceptable then HMRC will stamp the stock transfer forms and the exemption will be confirmed. If not the taxpayer is made aware of the failure and the stamp duty becomes payable before the documents will be stamped.
In practice HMRC are exceptionally picky in terms of the evidence that is presented to them in that bundle. Speaking with most tax advisers and lawyers who do this kind of work it is very common to have to submit the document bundle twice, clarifying certain points that HMRC are not happy with. We also understand that there are just two or three s.77 relief inspectors and so these standards are consistently maintained. HMRC are not afraid to publicise the fact they place high demands on taxpayers to obtain relief.
One of the features of s.77 relief is that the conditions for the relief need only be met at the time of the share for share exchange – there are no provisions that claw back the relief if the shareholders change immediately or shortly after the share for share exchange itself.
It now looks as though certain taxpayers have been abusing the lack of a claw back provision (which does exist in the equivalent SDLT relief) and in a recent announcement from HM Treasury they have confirmed that s.77 relief will be denied where at the time of the share for share exchange arrangements are in place for a change of control of the acquiring company. The measure affects all transactions executed after 29 June 2016 and any s.77 relief claims now made will need to confirm that there were no such arrangements in place at the date of the transaction.
You can read more about the changes here